The Centre for European Reform is a think-tank devoted to improving the quality of the debate on the European Union. It is a forum for people with ideas from Britain and across the continent to discuss the many political, economic and social challenges facing Europe. It seeks to work with similar bodies in other European countries, North America and elsewhere in the world.

Wednesday, October 28, 2015

In Sunday’s general election in Poland, voters decisively rejected the previous centre-right coalition government in favour of Law and Justice (PiS) – a party which is socially conservative but economically left-leaning. Its electoral victory is likely to lead to a departure from the country’s consensual style in the EU. Among other things, this could complicate the prospects for agreement on how to deal with the refugee crisis in Europe. It could also threaten the hopes of the British prime minister, David Cameron, for a quick deal on EU reform: Law and Justice may try to use the British renegotiation to unpick what it does not like in the current EU agenda.

Law and Justice won almost 38 per cent of the vote; only 24 per cent favoured the status quo and voted for Civic Platform (PO) – the party of European Council president Donald Tusk, which led a coalition government for the last eight years. Law and Justice will have 235 MPs in the 460 seat ‘Sejm’ (the lower chamber of the Polish parliament). This ten-seat majority allows Law and Justice to govern alone. But such a narrow majority could make the government vulnerable to internal squabbles, so the party may well try to persuade individual MPs to swap parties. In the Polish electoral system MPs can change their party allegiance without triggering a by-election. The natural candidates are MPs from ‘KUKIZ 15’, a populist right-wing party. Other parties which will be represented in the Sejm include ‘Nowoczesna’, a liberal party; and the Polish Peasant Party, which was in coalition with Civic Platform.

Chart 1: Distribution of seats in Polish Sejm by party

Source: Polish Electoral Commission
The international media have widely portrayed the Polish elections as a victory for an anti-EU party. But Law and Justice does not oppose European integration per se, although it criticises the current institutional balance of powers in the EU. It thinks that the European Commission has interfered too much in the domestic policies of member-states. And it dismisses the last government’s European policy as too submissive to Brussels and Berlin. All in all, there is unlikely to be a revolution in Poland’s European policy, but the new Polish government will become more assertive. When it was in government between 2005 and 2007, Law and Justice proved to be a difficult partner for the rest of the EU. Jarosław Kaczyński (the party’s leader, who was then Poland’s prime minister) made life miserable for Angela Merkel and complicated Germany’s efforts to obtain a consensus around the Treaty of Lisbon in 2007. There is no evidence that this time Law and Justice will be any more co-operative.

How did #CivicPlatform, which presided over robust economic growth, get ousted in PL elections?

Civic Platform’s poor electoral performance has surprised some foreign commentators. Politically, the party transformed Poland from a junior partner in the EU to a credible and well-established member. Economically, the last government presided over robust economic growth – Poland avoided a recession both during the 2008 financial crisis and the subsequent euro crisis (see Chart 2), and its economy grew by 29 per cent in the last eight years. This strong economic performance made Poland more influential in the EU.

Chart 2: Quarterly GDP growth

Source: Haver, Eurostat
But in Poland, the electoral defeat of Civic Platform surprised few. The party was a good administrator of EU structural funds; EU money has helped to modernise the country substantially. For many Poles, the economic growth has not, however, immediately translated into living standards comparable with those in Western Europe. On average, Poles are still worse off financially than their Western counterparts: real consumption per capita in Poland is still lower than the EU average (see Chart 3). Many voters felt that Civic Platform was more interested in consolidating its power than in trying to respond to the concerns of the average Pole. When prominent Civic Platform politicians were illegally recorded discussing state business in crude terms over expensive dinners, it only contributed to the view that Civic Platform was the party of the elite.

These blunders played into the hands of Law and Justice, which positioned itself as the party of all Poles. Beata Szydło, the party’s candidate for prime minister, promised that her government would lower the retirement age, introduce more generous family benefits, and give tax rebates for small businesses. It hopes to finance part of its electoral pledges by imposing a special turnover tax on large retailers, which are largely foreign owned, and on banks. This time, Law and Justice managed to attract voters from all walks of life: from rural and urban areas, with low and high levels of education. By contrast, in the 2011 parliamentary elections residents of the largest cities and people with higher education supported Civic Platform more than Law and Justice.

Chart 3: Real consumption expenditure per capita (in PPS)

Source: EurostatNotes: The purchasing power standard (PPS) allows for comparisons across countries with different currencies. The consumption expenditure is measured as actual individual consumption (AIC), which consists of private consumption but adds services consumed by households that are provided by the government or non-profit institutions.

The implementation of Law and Justice’s electoral promises could have repercussions both domestically and on the European stage. Since Poland’s accession to the EU in 2004, the stock of net foreign direct investment has grown by €100 billion. Measures like the proposed turnover tax could reduce foreign investment in Poland, and may be illegal under EU law.

Law and Justice’s policies could also put Poland’s public finances at risk. The Civic Development Forum, a foundation established by Leszek Balcerowicz, the finance minister in the first post-communist government and architect of Poland’s ‘shock therapy’ reforms, argues that implementation of all the electoral pledges of Law and Justice would cost 138 billion zlotys (€34.5 billion); Civic Platform’s proposals would cost only 21.5 billion zlotys (€5.3 billion).

According to recent analysis by Erste Group Research, Law and Justice will either have to be more restrained in implementing its policies or it may risk the European Commission initiating the excessive deficit procedure against Poland. The Commission steps in when an individual member-state is at risk of breaching or has already breached the deficit threshold of 3 per cent of GDP, or when its government debt level is above 60 per cent and is not falling at a satisfactory pace (5 per cent per annum on average over three years). In its programme in 2014, Law and Justice strongly opposed the Commission’s interference in Poland’s budget. Any action by the Commission to initiate an excessive deficit procedure against Poland could thus reinvigorate eurosceptic sentiments among party’s members.

Law and Justice opposes what it thinks is the Commission’s unnecessary zeal in other areas. It heavily criticised the Commission’s scheme to relocate refugees. It condemned the outgoing government for voting in favour of the Commission’s proposal and for abandoning the Czech Republic, Hungary and Slovakia, its partners in the so-called Visegrad Four, who opposed it. Law and Justice at times used unpleasant anti-immigration rhetoric during the electoral campaign, and the next government will almost certainly oppose any proposals to create a permanent mechanism for redistributing refugees.

The refugee issue could lead to tensions not only between Warsaw and the Commission but also with Berlin: Chancellor Angela Merkel supports a more ambitious EU policy towards the refugee crisis. Germany is set to receive more than 800,000 asylum seekers this year, and wants a European solution to what it sees as a European problem. Angela Merkel’s legacy will depend partly on whether she achieves this objective: if the new Polish government decided to stand in her way this could damage Polish-German relations, which under the last government were better than at any point since World War II.

Germany has also helped Poland to navigate through a multi-tier EU, hoping that it would join the eurozone club in the future. Warsaw has successfully used its ‘pre-in’ status to secure a more inclusive ‘euro plus’ mode of governance. This would not have been possible without Berlin’s support. But the new government may be less interested in maintaining this course. In its 2014 programme, Law and Justice pledged that it would keep the Polish zloty. A year later Beata Szydło promised to ditch the post of the official in charge of euro adoption in Poland and postpone discussion of joining the eurozone until the wages of Poles were similar to those of their colleagues in Western Europe.

The party’s mistrust of the euro is good news for David Cameron. Part of the British prime minister’s renegotiation agenda is to obtain safeguards for Britain and other euro-outs so that eurozone decisions cannot damage the single market. A Law and Justice government would probably show more understanding for Cameron’s concerns than Civic Platform did. In 2007 the Polish government, led by Law and Justice, negotiated a mechanism to allow the EU to delay a decision if it threatens the interests of some member-states but they do not have enough votes in the Council to block it (the so called ‘Ioannina bis’ mechanism). Law and Justice may be willing to help Britain to revive this mechanism for euro-outs. As the CER has already argued, Law and Justice would probably also agree to strengthen the role of national parliaments, and might be more sympathetic to Cameron’s plans to obtain an exemption from the goal of ‘ever closer union’.

But will the new government obstruct Cameron’s wish to limit EU migrants’ access to welfare benefits? During the electoral campaign, Law and Justice blamed the previous coalition government for the emigration of young Poles to countries like Britain. The party pledged to create incentives for Poles not to leave Poland. At first sight, it looks as though Cameron’s plans could dovetail with Law and Justice’s objectives, making Law and Justice less critical than Civic Platform of British plans to curb in-work benefits for EU citizens. But in the 2015 presidential campaign Andrzej Duda, the Law and Justice candidate who eventually won the election, promised to nurture relations with the Polish diaspora. A Law and Justice government will continue this course and oppose changes which would discriminate between British and other European citizens. If the new government softened Poland’s stance it would be criticised by Poles both abroad and at home.

Unless #Cameron is ready for a trade-off with Law & Justice he should get ready for a bumpy ride

The British may still think that Law and Justice will be, on balance, more supportive of Cameron’s plans than Civic Platform. Law and Justice belongs to the same group in the European Parliament as the British Conservatives (the European Conservatives and Reformists Group). But British Tories should be wary of their new counterpart’s transactional style. The party may see the British renegotiations as an opportunity to try to get concessions in completely unrelated areas of particular interest to Poland. One area they might target is EU climate policy, seeking concessions on emission targets, given Poland’s heavy reliance on coal. However unlikely they are to get what they want, they could hold up the agreement Cameron needs. He should prepare for a bumpy ride when his reform package is discussed among EU leaders, including with the new Polish prime minister

Agata Gostyńska-Jakubowska is a research fellow at the Centre for European Reform.

Friday, October 16, 2015

David Cameron wants national parliaments to have more say in the EU, but other European capitals have little appetite for radical change. He should instead focus on improving existing mechanisms for parliaments to influence draft EU legislation.
The British Prime Minister, David Cameron, has been touring European capitals to present his package for reforming the EU. Among other things, he wants a stronger role for national parliaments in the EU, but he has yet to make detailed proposals. Philip Hammond, the foreign secretary, calls this the “scoping stage” during which Cameron is testing Europe’s appetite for reforms.

National parliaments can already club together to tell the Commission that a draft EU law is unnecessary if it covers an issue better left to individual member-states to regulate (the ‘subsidiarity principle’). Each national parliament has two votes (one vote per chamber in bicameral parliaments) which it can cast against a Commission proposal. One third of all the votes (or a quarter in relation to justice and home affairs proposals) constitutes a so-called ‘yellow card’; more than half of the votes constitutes an ‘orange card’. The problem is that the Commission can in both cases press on with its proposals. The orange card is only stronger because, when parliaments show one to the Commission, a vote by 55 per cent of the member-states in the Council of Ministers or a simple majority of the European Parliament can block the proposal at the beginning of the legislative process.

Eurosceptics in the Conservative Party have long argued that national parliamentarians rather than unelected technocrats in Brussels should judge whether EU legislation will benefit citizens and enterprises. They want to give parliaments a ‘red card’, so that national legislatures can join together to force the Commission to withdraw draft laws. In their 2015 election manifesto the Tories promised to give parliaments powers to block EU legislation, and eurosceptics want Cameron to deliver on this pledge.

In July 2015 the House of Lords EU Select Committee advised David Cameron to look at more constructive ways for MPs to get involved in the EU. The peers favour a ‘green card’, whereby parliaments could suggest that the Commission propose laws, or amend or repeal existing EU legislation. A green card procedure might tackle the misconception in Brussels that national parliamentarians are more interested in blocking EU decision-making than in making the Union more effective. The Lords think that EU leaders would give a warmer welcome to ideas which promoted a positive role for parliaments. The UK’s Europe minister, David Lidington, has acknowledged the idea but refused to say whether the green card would be part of the renegotiation package.

David Cameron stands little chance, however, of getting support for green and red cards from all 27 member-states. Probably only The Netherlands, Hungary and Denmark would back him. Since the Dutch voted down the EU’s constitutional treaty in 2005, their government hopes that national MPs, who are often more attuned to voters’ concerns than MEPs, can help to narrow the gap between the EU and its citizens. Cameron can also count on Hungary’s prime minister. Viktor Orbán’s firm opposition to the Commission’s push for mandatory refugee quotas has been popular with Hungarians. If a red card procedure could block similar Commission proposals in future, then Orbán could further boost his ratings at home by endorsing Cameron’s idea. Denmark would probably back green cards, if not red ones. The chair of the Danish European affairs committee in the last parliament, Eva Kjer Hansen, championed green cards, arguing that MPs are “in politics to seek solutions, not just block things”. Now that she is in the liberal government of Lars Løkke Rasmussen, she should not find it too difficult to convince the Danish prime minister to support it.

There are also several other EU countries which are unlikely to stand in Cameron’s way. Ireland may not be convinced about the added value of Cameron’s proposals: between 2010 and 2013 Ireland opposed only five Commission proposals on the grounds of subsidiarity: Irish parliamentarians are not desperate to participate in EU decision-making. But Ireland will probably not put its long-standing political, cultural and economic ties with Britain at risk over the issue of national parliaments.

None of these countries, however, want treaty change, so Cameron will have to come up with creative ideas for introducing red or green cards without reopening the EU treaties. According to the treaties it is the European Commission that proposes new legal acts and decides whether to withdraw or persist with a proposal in the face of a yellow card. But there is nothing to stop Cameron from proposing a gentleman’s agreement to the Commission, whereby it would undertake to respect green or yellow cards. If Cameron fails to get such an agreement, he could try urging the Council of Ministers or the European Parliament to make a political commitment to drop a Commission proposal after national parliaments show an orange card.

But the European Parliament and the Commission, both of which are sceptical about any radical changes to the involvement of national parliaments, will resist such ideas. They think that parliaments’ main role is to hold their governments to account for their European policy, not to police the EU’s decision-making process. These institutions think that, were parliaments exerting greater pressure on their governments to raise their concerns and suggestions in Brussels, they would not need cards to make their voice heard.

From the perspective of the European Parliament, a bigger role for national parliaments could alter the current institutional balance in the EU, by which the European Parliament keeps the European Commission on a tight rein. MEPs do not have the right to propose laws, but the Treaty on the Functioning of the European Union gives the European Parliament the right to ask the Commission to submit a new legislative proposal. The Commission has to justify itself to MEPs if it decides to reject such a request. The new Commission has promised to legislate less rather than more, so it is likely that MEPs will resort to this mechanism more often. But national parliaments, if they had a green card, could steal the European Parliament's thunder.

The European Commission opposes red and green cards, too, because it fears losing its monopoly on legislative proposals. But if the success or failure of negotiations with the UK were at stake and Cameron managed to convince more member-states to back his ideas, the Commission might be ready to compromise – though it would probably attach conditions. Some EU officials have suggested that if a member-state has opted out of a policy area (such as justice and home affairs or the euro), then its parliament should not count towards the number of parliamentary chambers needed to show a card. If that rule were applied, it would make it more difficult for Westminster to build a coalition of parliaments to oppose deeper co-operation in these areas. British eurosceptics would find such a compromise difficult to swallow.

But most member-states, including Germany and France, will not be prepared to make far-reaching concessions on national parliaments. They complain that MPs show little interest in European affairs, fail to use the full potential of the existing yellow card procedure and should not take on new European responsibilities. Spain may prove to be most opposed: it frets that if parliaments had the right to veto Commission proposals they could create chaos and paralyse the decision-making process. Some member-states, like Belgium, Latvia and Slovenia, also fear that giving national parliaments red or green cards would weaken the supranational institutions: smaller and newer member-states have traditionally relied on the Commission and on the European Parliament to help them defend their interests. They worry that larger states have greater policy-making capability and more human resources.

But there is some good news for David Cameron: member-states do not want the British prime minister to leave the negotiating table empty-handed. They are keen to improve the existing yellow card procedure, which is not working properly. One problem is the current eight week deadline for showing a yellow card: some parliamentary chambers, including the House of Lords, have struggled to submit their objections to Commission proposals in time because of their parliamentary timetables. Another problem is that parliaments can only show the Commission a yellow card when they think that the subsidiarity principle has been breached. They cannot challenge the Commission’s draft laws if they fear that the proposals exceed what is necessary to achieve the objectives set out in EU treaties (the ‘proportionality principle’).

Cameron should therefore focus on suggesting improvements to the current yellow card procedure rather than demanding the impossible.

The British government's own review of the balance of competences between the EU and the UK makes some useful recommendations in the report on the subsidiarity and proportionality principles. Cameron and his renegotiation team should also monitor an initiative by Luxembourg’s parliament. Marc Angel, the chair of Luxembourg's parliamentary committee on foreign and European affairs, defence, cooperation and immigration has established a working group composed of representatives of all national parliaments and the European Parliament, to look at the potential of the green card system and explore the scope to improve the current yellow card procedure. Its first meeting will take place on October 30th.

Finally, the British prime minister should be prepared to go to the European Parliament and argue for his ideas on making the EU more democratic. He has criticised the Parliament in the past, but he needs to accept that it is not going away, and MEPs need to be involved in any discussion of the EU’s democratic deficit. In September Martin Schulz, the Parliament’s president, invited David Cameron to address the plenary and elaborate on his reform package, eurosceptics will try to dissuade him from addressing MEPs. They will argue that the British prime minister is accountable only to the British parliament and should not waste his time in Strasbourg, but Cameron should ignore them. If any of his proposed reforms require changes to EU legislation, they will need the Parliament’s imprimatur. The sooner Conservative eurosceptics understand this, the better.

This insight is part of on-going research supported by a grant from the Open Society Foundations.

Agata Gostyńska-Jakubowska is a research fellow at the Centre for European Reform.

Wednesday, October 07, 2015

When oil prices go up, governments of oil-importing countries worry. But when oil prices go down, there is a sigh of relief. Low oil prices give European economies a boost, but in terms of foreign and security policy, Europe’s neighbourhood faces more instability as oil-producing countries struggle with a fiscal crunch.

Between 2005 and 2014 there was an extended period of high oil prices. From 2011 to 2014, Brent oil averaged $107 per barrel. But in mid-2014 prices plummeted. Oversupply – booming US shale oil production in combination with unchanged levels of production in OPEC countries – met falling demand, particularly from a slowing Chinese economy. Supply disruptions, sanctions and conflicts – which removed more than 3 million barrels per day from the market in 2015 – had little effect on the downward trend in oil prices. On October 6, Brent oil was trading at around $52 per barrel.

Source: IMF, EIA

The period of high oil prices had negative consequences. It led to a massive transfer of wealth from Western economies to oil producing ones, which weighed on European recoveries and filled the state coffers of (mostly) less democratic states. Defence spending, repression and corruption increased in the Middle East and Russia. Since oil products are a key ingredient in fertilisers, high oil prices contributed to soaring food prices, putting extra strain on import-dependent emerging economies, like Egypt. This was one of the factors that led to the 2011 Arab Spring uprisings. Pirates and militant groups in the Gulf of Guinea specialised in stealing crude oil from pipelines and tankers.

Now, developments in both supply and demand are likely to depress prices for some time, perhaps until the end of the decade. The markets are bearish about prospects in the years ahead: oil futures contracts for early 2020 currently trade at less than 60 US dollars ($). On the supply side, American shale or ‘tight’ oil production can respond to price changes more quickly than conventional production can. Rystad Energy, a Norwegian energy consultancy, estimates that on average US shale oil becomes economic to produce at $58 per barrel; so increased US supply could slow global price rises above that level. In addition, in mid-2016 sanctions on Iran’s oil sector will end; as it attempts to win back market share it could soon add one million barrels per day to global output, increasing the world’s excess capacity.

On the demand side, China is slowly moving away from energy-intensive heavy manufacturing towards domestic and urban services, and its growth rates will inevitably fall from stellar to merely robust. The recovery in the eurozone is shaky, the IMF has corrected its global growth forecast downwards and overall energy efficiency gains mean the world confronts a depressed demand for oil, for now.

So, is the current price decline a good thing? Unfortunately a sustained period of low oil prices will create its own foreign and security policy problems. Low oil prices hurt the bottom line of oil-exporting countries. The IMF expects the export earnings of the Gulf states this year to decline by $287 billion due to the price collapse. Since 2011 governments across the Middle East have increased social spending to keep their populations happy in the wake of the Arab Spring uprisings. They may now struggle to maintain that spending.

In many oil-exporting states, those who control the oil wealth control most of the economy. If expected oil proceeds decrease in countries where ethnic, tribal or religious communities compete for political influence – as in many countries in the Middle East – this could become a cocktail for instability and conflict. Jihadist groups in the region may find it easier to recruit disgruntled youth when economic problems rise. The risk of social unrest may lead governments to increase repression, resulting in human rights violations, terrorism and migratory pressures.

The chart below shows the depth of a country’s state coffers and the oil price at which oil-exporters can balance their books (called the ‘fiscal breakeven price’). The size of the bubble reflects the population that needs to be kept happy. An oil-exporter would prefer to be in the lower right-hand corner: able to balance the books with a low oil price, and with substantial government reserves to withstand years of low oil prices. Countries in the upper left-hand corner have breakeven prices in excess of the current oil price, and small financial buffers.

Source: IMF, Deutsche Bank, World Bank

Only Kuwait still earns money at current prices. Saudi Arabia can weather low oil prices for a long time due to its massive reserves, but others are not so fortunate. Bahrain has a high breakeven price, limited government reserves, large debts and a high rate of oil and natural gas extraction; only about ten years’ worth, at current rates. Under these difficult economic conditions, tensions between the ruling Sunni minority and the Shi’a majority could boil over, as they did during the Arab Spring. Despite its small financial buffer, Iraq sits on massive oil wealth and has a relatively low fiscal breakeven price. This suggests that if it is able to attract investment into its oil sector, it could prosper despite low oil prices. But the fight against the Islamic State terror group and Baghdad’s inability to reach a revenue-sharing agreement with the Kurds mean this may be difficult.

#SaudiArabia can weather low #oil prices due to its reserves - others however are not so fortunate

Outside the Middle East, crude oil, natural gas and oil products make up 90 per cent of Nigeria’s exports. It has limited reserves, a high breakeven price and a large and growing population that demands improved social services and economic opportunity. Groups like Boko Haram could exploit such grievances.

The Russian economy is heavily dependent on oil as Andrey Movchan from Carnegie’s Moscow centre explains. The chart above suggests that it has substantial reserves to deal with low oil prices, but Ian Bond and Christian Odendahl have argued that Russia’s state coffers may not be as full as the official statistics suggest. Russia has responded to low oil prices by pumping record quantities of crude, but Western sanctions against its financial and oil sectors as a result of its intervention in Ukraine are making it hard for Russia to replace depleted oil fields. If low oil prices persist, President Vladimir Putin will have to choose between maintaining social spending and pushing on with his expensive programme of defence modernisation. Although Russia’s vulnerability to oil price fluctuations should convince him to diversify the Russian economy, Putin may prefer to distract public opinion with military adventures abroad. It is worth remembering that Iraq’s president Saddam Hussein invaded neighbouring Kuwait in 1990 during a period of low oil prices.

Metal prices have fallen along with the oil price, and so developing countries that are dependent on mineral extraction face similar difficulties: copper accounts for 73 per cent of Zambia’s exports; 60 per cent of Mauritania’s exports comprise iron ore and copper; 90 per cent of the Democratic Republic of Congo’s exports consist of copper, cobalt and oil. The longer the price slump lasts, the more weak governments in these countries – many of which have a history of civil strife – will struggle.

The role of the US in both global oil markets and (potentially) Middle Eastern politics will change. American shale oil will continue to put downward pressure on prices. It makes the United States, not Saudi Arabia, the global swing-producer; and it challenges the cohesion of the OPEC oil cartel, as maintaining market share rather than high prices becomes the overriding concern for OPEC’s members.

In Europe, the impact of low oil price is mixed. The economic effects are clearly positive: low oil prices boost household incomes and reduce production costs. The impact of the Chinese slowdown, a negative for the European economy, is partially off-set by the subsequent fall in the oil price. But persistently low prices may complicate the EU’s efforts to reduce its dependence on Russian gas by delaying investment and production in some of Europe’s most important gas and oil suppliers, including Algeria and Azerbaijan. The Shah Deniz-2 gas project in the Caspian, bringing gas from Azerbaijan to Europe and a critical element in the EU’s efforts to increase its supply of non-Russian gas, loses money at current prices.

From a climate perspective, there is both good and bad news. The exploitation of high-cost energy sources will be delayed, including off-shore Arctic resources, complex ultra-deepwater fields and Canadian tar sands. Perhaps $200 billion in capital expenditures, mostly involving deepwater and oil sands projects, has been deferred due to the oil price bust, say energy consultants at WoodMackenzie. (Some Arctic projects and oil sands production could become economic again at $70 per barrel.) The controversial development of European shale resources might be unnecessary (and uneconomic) with the current oil and gas glut.

In the longer term, low oil prices should create an incentive for oil producers to modernise their economies to reduce their dependence on hydrocarbon exports – if they can afford the necessary investment and show the political will. If so, Europe should be prepared to assist them with the transition.

But low oil prices also challenge European climate policy, which rested on the assumption that oil prices would continue to rise, gradually making renewables and other low-carbon technologies more attractive. Low oil prices are linked to a drop in the carbon price. Meanwhile, coal has also become cheaper. Robust regulation rather than market forces will thus be needed to achieve Europe’s climate objectives. This also has consequences for the international climate conference in Paris in December. In a low oil-price environment, reaching binding decisions on climate targets becomes much harder. Though the US and China may push for an agreement in Paris, emerging economies like India and Turkey – which experience soaring energy demand – may be more reluctant to commit to costly emissions-reductions strategies.

Finally, and most urgently for European policy-makers, the arc of instability around Europe’s southern and eastern periphery, full of oil-exporting countries, will get more unstable if the oil slump lasts. This could lead to more regional conflict, an increased risk of terrorism, new refugee flows to Europe and more stress on EU countries struggling to cope with mass migration. European governments should consider this when debating spending priorities: a world of low oil prices will demand investment in development and humanitarian aid, security and in capable military forces.

The arc of instability around #Europe may get more unstable if cheap #oil lasts

Oil prices that are neither too high nor too low are good from a foreign policy perspective. But because the oil market tends to overshoot and undershoot, a ‘goldilocks’ oil price will remain elusive. For now, Europe should be ready for its neighbourhood to stay turbulent as long as cheap oil reigns.

Rem Korteweg is a senior research fellow at the Centre for European Reform.